Christie’s will soon auction a brass sculpture of the head of a muse from the estate of a New Orleans art enthusiast for over $70 million, breaking its own auction record. The fact that the decedent purchased the sculpture for $5,000 in 1955 signals interesting estate and income tax consequences – possibly impacting multiple generations. The ownership of this sculpture alone (the decedent owned several other pieces), may create a significant taxable estate. Also, this muse may be submitted to the intriguing IRS Art Appraisal Panel.
Even with a fairly high $10 million base exemption amount, this estate could be largely taxable unless most of the decedent’s assets, including the sculpture, were transferred from the decedent’s estate during her lifetime, into perhaps, grantor retained income trusts (GRIT) and other irrevocable trusts, through gifting, family limited partnerships (FLP), or otherwise. FLPs are especially attractive because fractional interests can benefit from substantial valuation discounts. The IRS did not permit valuation discounts for fractional ownership in art until 2014, when the Fifth Circuit, in Elkins v. Commissioner, allowed substantial discounts on fractional ownership of art. See Bloomberg BNA’s coverage of the Elkins case in 2014 here.
The decedent’s three beneficiaries have also expressed an interest in making charitable contributions of at least some of the proceeds. With the 2017 tax act increasing the individual cash contribution limit from 50% of adjusted gross income to 60%, they could plan to take maximum advantage of the increased deduction before it expires after 2025.
The beneficiaries can further their charitable intent while also maximizing multi-generational wealth accumulation if some of the charitable contributions are made through trusts. The funds could be invested through various charitable retained interest trusts, for example, which would provide a generous deduction, in the amount of annuity payments or the remainder interest, while also providing substantial payouts to the nonexempt beneficiaries. Further, the payouts can be incorporated such that the funds are transferred into additional trusts, including dynasty trusts, or are used to create fractional interests in family owned partnerships.
One of the more interesting aspects of estate tax audits is that the IRS has the resources to audit even the most unusual items. It has had valuations performed internally for everything from show-dogs to parcels of land in obscure locations globally. The Panel consists of a group of independent art “experts,” including appraisers, dealers, and curators who convene voluntarily for the IRS twice a year to value artwork reported on tax returns, usually as deductions for charitable contributions, or as transferred assets on estate and gift tax returns. The internal IRS Art Appraisal Services (AAS) unit then reviews the Panel’s recommendations and forwards a written opinion of value to the IRS auditor. However, the taxpayer can successfully dispute a determination of undervaluation with reasonable facts and circumstances, which would allow the IRS examiner to lower the proposed value or apply a higher discount, as applicable.
While the AAS also provides Statements of Value on a fee per item basis to taxpayers, estates with large collections generally find it more cost-effective to substantiate their reported values with an appraisal from an independent art appraiser. In this case, the decedent collected exotic art and if they are a part of the estate, the estate would seek appraisals from a seasoned art appraiser.
An estate of this magnitude with multiple pieces of art would generally trigger an IRS audit and related Panel submissions. In terms of the sculpture, specifically, the IRS would generally accept the reported value if the estate reports the auction sale price as the fair market value without modification on the return. However, a reported value other than the auction price could lead to a submission of the sculpture to the Panel to verify any discounts or modifications claimed by the estate (of course, the other pieces are likely to go to the Panel as well, unless they are sold in the near future).
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